The FPA Capital Fund (Trades, Portfolio) disclosed its third-quarter portfolio this week, revealing it exited one position during the quarter and reduced several others.
The Los Angeles-based fund, which is managed by Arik Ahitov, seeks to invest in small- and mid-cap companies to achieve long-term capital growth. It looks for companies that have competitive advantages, little to no leverage and three-to-one upside-downside scenarios.
Based on these criteria, the fund sold out of its Cimarex Energy Co. (XEC, Financial) holding. It also reduced its positions in several other companies, including Western Digital Corp. (WDC, Financial), MKS Instruments Inc. (MKSI, Financial), Valmont Industries Inc. (VMI, Financial) and Ryder System Inc. (R, Financial).
Cimarex Energy
FPA sold its 223,975 remaining shares of Cimarex Energy, impacting the equity portfolio by -7.86%. The stock traded for an average price of $47.44 per share during the quarter.
GuruFocus estimates the firm gained 21.24% on the investment since the first quarter of 2009.
The Denver-based oil and gas producer has a $4.39 billion market cap; its shares were trading around $44.55 on Wednesday with a price-earnings ratio of 6.97, a price-book ratio of 1.12 and a price-sales ratio of 1.77.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting the stock is undervalued.
GuruFocus rated Cimarex’s financial strength 4 out of 10. Although the company has a low cash-debt ratio of 0.01, it has adequate interest coverage. Regardless, the Altman Z-Score of 1.49 warns that the company is in financial distress and could be at risk of going bankrupt as its revenue per share has declined over the past five years.
The company’s profitability and growth fared better, scoring a 6 out of 10 rating on the back of an expanding operating margin and strong returns that outperform a majority of competitors. Cimarex is weighed down by a low Piotroski F-Score of 3, which suggests business conditions are in bad shape. It also has a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.
Of the gurus invested in Cimarex, Diamond Hill Capital (Trades, Portfolio) has the largest stake with 7.24% of outstanding shares. Other top guru shareholders are Charles de Vaulx (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Howard Marks (Trades, Portfolio), Steven Cohen (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Chuck Royce (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Western Digital
The fund trimmed its Western Digital position by 54.97%, selling 102,922 shares. It now holds 84,327 shares, which account for 3.72% of the equity portfolio. During the quarter, the stock traded for an average price of $56.35 per share.
Based on GuruFocus data, the fund has gained approximately 73.5% on the investment since the third quarter of 2009.
The hard disk drive manufacturer, which is headquartered in San Jose, California, has a market cap of $18.08 billion; its shares were trading around $60.62 on Wednesday with a price-book ratio of 1.77 and a price-sales ratio of 1.08.
According to the median price-sales chart, the stock is trading above its historical average. This indicates it is overvalued.
Weighed down by a low cash-debt ratio and weak interest coverage, Western Digital’s financial strength was rated 4 out of 10 by GuruFocus. In addition, the Altman Z-Score of 1.92 suggests the company is under some financial stress.
The company’s profitability and growth scored a 7 out of 10 rating despite having a declining operating margin and negative returns. Western Digital also has a moderate Piotroski F-Score of 4, which indicates business conditions are stable. The three-star business predictability rank is on watch due to a decline in revenue per share over the past 12 months. GuruFocus says companies with this rank typically see their stocks gain an average of 8.2% per year.
With 7.24% of outstanding shares, Simons’ firm is the company’s largest guru shareholder. PRIMECAP Management (Trades, Portfolio), the T Rowe Price Equity Income Fund (Trades, Portfolio), Pioneer, First Pacific, Robert Olstein (Trades, Portfolio), Hotchkis & Wiley and Jones also own the stock.
MKS Instruments
FPA reduced its holding of MKS Instruments by 46.21%, selling 45,061 shares. It now holds 52,445 shares, which represent 3.58% of the equity portfolio. Shares traded for an average price of $82.47 during the quarter.
According to GuruFocus, the fund has gained an estimated 7% on the investment since establishing it in the first quarter.
The Andover, Massachusetts-based company, which provides systems to measure, power and control critical parameters of advanced manufacturing processes, has a $5.1 billion market cap; its shares were trading around $93.51 on Wednesday with a price-earnings ratio of 23.79, a price-book ratio of 2.61 and a price-sales ratio of 2.73.
Based on the Peter Lynch chart, the stock appears to be overvalued.
GuruFocus rated MKS Instruments’ financial strength 6 out of 10. In addition to adequate interest coverage, the Altman Z-Score of 3.83 suggests the company is in good financial health.
Driven by an expanding operating margin, the company’s profitability and growth scored a 9 out of 10 rating. MKS is also supported by strong returns that outperform a majority of industry peers and a moderate Piotroski F-Score of 4. The one-star business predictability rank is on watch as a result of a decline in revenue per share over the past year.
Simons’ firm is the company’s largest guru shareholder with 2.93% of outstanding shares. Royce, Ken Fisher (Trades, Portfolio), Cohen, Pioneer, First Pacific and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.
Valmont Industries
Ahitov curbed the fund’s position in Valmont Industries by 61.4%, selling 27,325 shares. FPA Capital now holds 17,181 shares, which make up 1.76% of the equity portfolio. The stock traded for an average per-share price of $134.15 during the quarter.
GuruFocus estimates the fund has gained nearly 6% on the investment since establishing it in the first quarter.
The manufacturer of irrigation equipment, windmill structures and lighting and utility poles, which is headquartered in Omaha, Nebraska, has a market cap of $2.94 billion; its shares were trading around $136.66 on Wednesday with a price-earnings ratio of 29.67, a price-book ratio of 2.77 and a price-sales ratio of 1.07.
The Peter Lynch chart suggests the stock is overvalued.
Valmont’s financial strength was rated 6 out of 10 by GuruFocus on the back of sufficient interest coverage. The Altman Z-Score of 3.82 indicates it is in good financial standing.
The company’s profitability and growth did not fare as well, scoring a 4 out of 10 rating on the back of declining margins. Returns, however, outperform over half of its competitors. Valmont also has a moderate Piotroski F-Score of 4. Despite recording consistent earnings and revenue growth over the past decade, the company’s five-star business predictability rank is on watch. According to GuruFocus, companies with this rank see their stocks gain an average of 12.1% per year.
Of the gurus invested in Valmont, Royce has the largest holding with 1.94% of outstanding shares. Other top guru shareholders are Pioneer, Simons’ firm, First Pacific, Hotchkis & Wiley, Jones, the CI Can Am Small Cap (Trades, Portfolio) Fund, Mario Gabelli (Trades, Portfolio), Greenblatt and Cohen.
Ryder System
FPA Capital reduced its position in Ryder System by 48.54%, selling 47,188 shares. It now holds 50,024 shares, which account for 1.92% of the equity portfolio. The stock traded for an average price of $52.23 per share during the quarter.
GuruFocus estimates the fund has lost nearly 12% on the investment since the first quarter.
The Miami-based company, which provides supply chain and fleet management solutions, has a $2.76 billion market cap; its shares were trading around $51.55 on Wednesday with a price-earnings ratio of 8.58, a price-book ratio of 1.06 and a price-sales ratio of 0.3.
According to the Peter Lynch chart, the stock is undervalued.
GuruFocus rated Ryder System’s financial strength 3 out of 10. As a result of issuing approximately $2 billion in new long-term debt over the past three years, the company has poor interest coverage. In addition, the Altman Z-Score of 1.03 warns the company could be at risk of going bankrupt.
The company’s profitability and growth fared better with a 6 out of 10 rating. In addition to an expanding operating margin, Ryder is supported by returns that outperform at least half of industry peers, a moderate Piotroski F-Score of 5 and a one-star business predictability rank.
With 4.39% of outstanding shares, Richard Pzena (Trades, Portfolio) is the company’s largest guru shareholder. Other top guru investors are First Pacific, Simons’ firm, Jones, Caxton Associates (Trades, Portfolio) and Barrow, Hanley, Mewhinney & Strauss.
Additional trades and portfolio performance
During the quarter, FPA Capital also reduced its positions in AGCO Corp. (AGCO, Financial), Avnet Inc. (AVT, Financial), Ambarella Inc. (AMBA, Financial), Frank’s International NV (FI, Financial) and Allegiant Travel Co. (ALGT, Financial).
The fund’s $135 million equity portfolio is composed of 24 stocks. The four largest sectors represented are consumer cyclical, technology, industrials and financial services.
According to the fund’s website, it underperformed the Russell 2500 in 2018 with a return of -17.61%. The index posted a -10% return.
Disclosure: No positions.
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